The Results Are In: It’s a Mixed Signal Election

The House of Representatives has flipped to Democratic control and Republicans added to their Senate majority, in line with our base case predications. While this was an expected outcome, the results expose the political divide that exists in American politics, which will have a significant impact on the upcoming agenda. The better-than-expected Senate results for Republicans will be a significant boost to Trump’s deregulatory agenda. On the legislative agenda, an infrastructure bill, drug pricing bill, and investigations lead the Democratic agenda in the House, potentially opening the door to some surprising bipartisan compromises in 2019.

What Happens Now?

The immediate pivot will be to China trade and the Mueller investigation. We do not see any reason these election results will change President Trump’s position on trade issues, and the probability of sustained negative Mueller investigation headlines could cause Trump to take bold action to change the press narrative. This will add to near-term volatility.

2019 Agenda

Democrats are expected to pursue Congressional investigations, a bill to lower prescription drug prices, and a potential infrastructure bill. Immigration debates/a possible DACA deal, as well as potential tweaks to the tax law, could be part of a possible surprise compromise. We expect spending to be at or near current levels. This is a continuation of the fiscal stimulus agenda of the last two years. Should Congress step back from its fiscal stimulus, it could impact the Fed in its monetary policy decision-making.

Trump’s Deregulatory Agenda

Republicans expanded their majority in the Senate, exceeding expectations. This is a significant boost to the Trump deregulatory agenda as it gives additional cushion to the confirmations. This cushion could embolden President Trump as he makes selections to cabinet posts, regulatory agencies and the courts.

Messaging the Results

We expect the messages coming out of the White House to focus on the Senate result and downplay the House flip, in line with historical norms. Nothing in these results is likely to change President Trump’s political style, and in many ways will likely embolden him in the coming years. President Trump campaigned heavily for Republican Senate candidates in the final weeks of the election, and the White House will view Senate Republican pickups as vindication of the president’s agenda. As it is in line with historical midterm results for the party in power to lose seats in the midterm election, the House flipping to Democrat control will be viewed by the administration as less of a referendum on the president’s agenda and more of an underperformance by Democrats given earlier expectations for major Democratic gains in the House.

Governors’ Races

The split decision on the Congressional level was repeated in gubernatorial races. Democrats had a series of key pickups, but Republicans held a number of races that seemed out of reach heading into election night. This will largely factor into the 2020 presidential election, including on the potential Democratic nominee, and boost the chances of President Trump keeping his coalition together.

Agenda of a Democratic House

Increased oversight of the Trump administration will be the biggest consequence of the House flip. With subpoena power in hand, Democratic leaders can conduct investigations of Trump cabinet officials and executive actions. Ethics will be a major focus of House Democrats with a sweeping ethics and government reform bill possibly gaining traction in the House. Other priorities may focus on healthcare reform/locking in popular aspects of the Affordable Care Act as a way to drive home and deliver on a key midterm campaign message. On other issues such as regulatory or tax matters, we see a rise in headline risk as a Democratic House may pursue a reversal of some Trump actions, but the chances of any rollbacks passing remain very low with a Republican Senate and a presidential signature required.

Trump’s Tax Returns

The House Ways and Means Committee has the authority to request the tax return of any individual from the IRS. We expect that committee to request the tax returns of President Trump and it is likely the Trump administration could fight the request, setting up a court battle. This will likely set the tone of an adversarial relationship between the Democratic House and the Trump administration that will lead to debates on a Constitutional crisis.

Rise of the Deficit Hawks?

A split result between the House and Senate will lead to speculation on whether deficit hawks in Congress will be emboldened to begin cutting government spending after two years of major fiscal stimulus under a Republican-controlled Congress and White House. We believe this concern will be overplayed, and our base case remains continued fiscal stimulus. Attention now turns to 2020, and although efforts at messaging to draw contrasts between the two parties’ agendas will be rampant, we do not expect any major reversals on taxes, domestic or defense spending advancing in a split Congress.

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